Annual Report - IDFC - 2009-2010

INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LIMITED

ANNUAL REPORT 2009-2010

DIRECTOR'S REPORT

TO THE SHAREHOLDERS

Your Directors have pleasure in presenting the Thirteenth Annual Report
together with the audited accounts for the year ended March 31, 2010.



Financial Results (Standalone)
FIGURES IN RS. CRORE
Particulars FY 2009-10 FY 2008-09

Operating Income 3,569.97 3,313.25
Other Income 27.13 9.45
Total Income 3,597.11 3,322.70
Less: Administrative Expenses* 199.38 128.79
Less: Provision for assets and losses 130.36 149.45
Profit Before Interest and Taxes 3,267.37 3,044.46
Less: Interest and Other Charges 1,950.23 2,079.54
Profit Before Tax 1,317.14 964.92
Less: Provision for Tax** 304.30 229.00
Profit After Tax 1,012.84 735.92

* Administrative expenses include staff expenses; travelling & conveyance;
postage telephone & telex; establishment expenses; other expenses and
depreciation.

** Provision for Tax is net of Deferred Tax.

Income from operations increased by 7.75% from Rs. 3,313.25 crore in 2008-

09 to Rs. 3,569.97 crore in 2009-10. Other income increased by 187.09% from
Rs. 9.45 crore in 2008-09 to Rs. 27.13 crore in 2009-10. IDFC's total
income, increased by 8.26% from Rs. 3,322.70 crore in 2008-09 to
Rs.3,597.11 crore in 2009-10.

Profit Before Tax (PBT) increased by 36.50% from Rs. 964.92 crore in 2008-
09 to Rs. 1,317.14 crore in 2009-10. Profit After Tax (PAT) increased by
37.63% from Rs. 735.92 crore in 2008-09 to Rs. 1,012.84 crore in 2009-10.

IDFC's quality of assets continued to be good with Net NPAs at Rs. 42.86
crore as on March 31, 2010.

DIVIDEND

Your Directors are pleased to recommend a dividend of Re. 1.50 per share
(i.e. 15%) for the year ended March 31, 2010.

OPERATIONS REVIEW

The first half of 2009 was characterized by contraction in most economies
of the world as the effect of the global financial crisis of September 2008
began to impact various sectors of the real economy. In the second half of
2009, some small signs of recovery began to manifest. The major economies
showed signs of recovery and in particular, the stimulus package launched
in the USA boosted consumer confidence. Economic indicators also showed
positive trends in some countries.

A large domestic market, resilient banking system and a policy of gradual
liberalization of capital account helped India in the early mitigation of
the adverse impact of global financial crisis and recession. Though credit
growth declined reflecting slowdown of the Economy in general and the
industrial sector in particular, investment remained relatively buoyant.
Increased plan expenditure, reduction in direct taxes, sector specific
measures for textiles, housing, infrastructure, through stimulus packages
coupled with regulation and supervision of financial institutions and
markets clearly contributed to soften the impact of the global financial
crisis on Indian Economy. Revisiting the agenda of pending economic reforms
has renewed the growth momentum, though it is too early to predict a time
frame for a full-fledged revival of the Economy.

Leveraging the opportunities provided by a growing economy, the Company
continues to see healthy growth in its lending activities. Gross approvals
increased by 195% from Rs.10,317 crore in 2008-09 to Rs.30,442 crore in
2009-10. Gross disbursements, increased by 60% from Rs.8,085 crore in 2008-
09 to Rs.12,962 crore in 2009-10.

As on March 31, 2010, IDFC's total exposure to infrastructure projects was
Rs.43,842 crore of which Energy was the highest (38.3%), followed by
Telecommunication & IT (24.4%) and Transportation (19.8%). The share of
Commercial and Industrial sector was 8.2%.

While the investment strategy for treasury operations continues to ensure
adequate levels of liquidity to support core business requirements, it has
started focusing on optimizing levels of return and functioning as a profit
centre investing in fixed income assets, while maintaining prudent safety
norms. Income from treasury operations decreased by 41% from Rs. 164 crore
in 2008-09 to Rs. 96 crore in 2009-10.

The investment banking and institutional brokerage business under the IDFC
Securities (earlier IDFC-SSKI) platform has improved during the year and
its income increased by 59% from Rs. 115 crore in 2008-09 to Rs.183 crore
in 2009-10. The mutual fund business that was acquired in 2008-09 has been
rechristened IDFC-AMC.

The Policy Advisory Group continued to contribute to IDFC's mandate of
leading private capital to infrastructure projects, by providing impetus to
rationalisation of policy and regulatory frameworks.

IDFC Private equity continues to be committed to the development of
infrastructure in the country and manages three funds-India Development
Fund, IDFC Private Equity Fund II and IDFC Private Equity Fund III having a
total capital commitment of Rs. 5,992 crore.

During the year, fee income from managing third party assets increased
substantially by 42% from Rs.203 crore in 2008-09 to Rs. 290 crore in 2009-
10.

During the year, IDFC Group has received several awards and recognitions,
the details of which are given in this Annual Report.

Detailed analysis of the performance of the Company and its businesses,
including initiatives in the area of Information Technology, has been
presented in the section on Management Discussion and Analysis of this
Annual Report.

SUBSIDIARY COMPANIES

IDFC has ten direct wholly owned subsidiary companies- IDFC Private Equity
Company Limited, IDFC Trustee Company Limited, IDFC Project Equity Company
Limited, IDFC Finance Limited, IDFC Securities Limited (earlier known as
IDFC-SSKI Securities Limited), IDFC Capital Company Limited, IDFC PPP
Trusteeship Company Limited, IDFC Projects Limited, IDFC Asset Management
Company Limited and IDFC AMC Trustee Company Limited. In addition IDFC
Securities Limited has two wholly owned subsidiary companies namely, IDFC
Capital Limited (earlier known as IDFC-SSKI Limited) and IDFC-SSKI Stock
Broking Limited.

During the year, IDFC Investment Advisors Limited (earlier a direct
subsidiary of IDFC) has become a subsidiary of IDFC Asset Management
Company Limited. IDFC Asset Management Company Limited along with the
Company has further floated IDFC Pension Fund Management Limited, one of
the Pension Fund Managers appointed by the Pension Fund Regulatory and
Development Authority (PFRDA) to manage retirement funds under the New
Pension Scheme (NPS) open to individuals in the private sector. Further,
IDFC Projects Limited (earlier a subsidiary of IDFC Finance Limited) has
acquired 51% stake in Dheeru Powergen Private Limited. Dheeru Powergen
Private Limited is in the process of setting up a 1050 MW (3x350MW) coal
based thermal power plant at District Korba, State of Chhattisgarh, India.
IDFC Capital Limited has a wholly owned subsidiary called IDFC Capital
(Singapore) Pte Limited.

During the year, IDFC Capital Limited has further floated two wholly owned
subsidiary companies namely, IDFC Fund of Funds Limited and IDFC General
Partners Limited.

A statement of particulars of IDFC's subsidiaries is annexed to this
report.

Detailed analysis of the performance of IDFC and its businesses-financing
and advisory, including initiatives in the area of Human Resources,
Information Technology, and Risk Management has been presented in the
section on Management Discussion and Analysis of this Annual Report.

As approved by the Central Government vide letter dated May 18, 2010 under
Section 212(8) of the Companies Act, 1956, copies of Balance Sheet, Profit
and Loss Account, Reports of the Board of Directors and Auditors of each of
the subsidiary companies have not been attached to the accounts of the
Company for F.Y. 2009-10. The Company will make available these
documents/details upon request by any member of the Company. These
documents/details will be available on the Company's website www.idfc.com
and will also be available for inspection by any member of the Company at
its Registered and Corporate Offices and also at the Registered Office of
the concerned subsidiaries. In accordance with the requirements of
Accounting Standard 21 (Consolidated Financial Statements), Accounting
Standard 23 (Accounting for Investment in Associates in Consolidated
Financial Statements) and Accounting Standard 27 (Financial Reporting of
Interests in Joint Ventures notified by the Companies (Accounting
Standards) Rules, 2006, the Consolidated Accounts of IDFC and its
subsidiaries have been prepared and the same are annexed to this Report.

JOINT VENTURES

IDFC has three joint ventures-Infrastructure Development Corporation
(Karnataka) Limited (iDeCK) in the state of Karnataka, Uttaranchal
Infrastructure Development Company Limited (UDeC) in the state of
Uttaranchal; and Delhi Integrated Multi Modal Transit System Limited
(DIMTS) in Delhi. IDFC has also invested in two associates-Feedback
Ventures Private Limited and Athena Power Projects Limited. iDeCK and UDeC
are engaged in advisory and project development work in the area of
infrastructure at respective state levels. DIMTS has been set up as a
special purpose vehicle to tackle the problem of ineffective public
transport delivery and provide expert services in the field of urban
transport. Feedback Ventures Private Limited provides consulting,
transaction advisory, project development, planning & engineering, and
project management services to companies, governments, financial
institutions, and developmental agencies in India and overseas. Athena
Power Projects Limited is a consortium between Power Trading Corporation
and IDFC to set up a 1,200MW power plant in Visakhapatnam in Andhra
Pradesh.

PARTICULARS OF EMPLOYEES

IDFC had 192 employees as on March 31, 2010. Particulars of employees as
required to be furnished pursuant to Section 217(2A) of the Companies Act,
1956, read with the rules there under, form part of this Report. However,
as per the provision of Section 219(1)(b)(iv) of the Companies Act, 1956,
the reports and accounts are being sent to all the shareholders of the
Company excluding the statement of particulars of employees. Any
shareholder interested in obtaining a copy may write to the Company
Secretary.

EMPLOYEES STOCK OPTION SCHEME (ESOS)

Pursuant to the resolution passed by the members at the Annual General
Meeting held on August 2, 2006, IDFC has introduced Employee Stock Option
Scheme 2007 (referred to as 'the Scheme') to enable the employees of IDFC
and its subsidiaries to participate in the future growth and financial
success of the Company.

Out of the 21,766,956 options outstanding at the beginning of the year,
485,356 options lapsed on account of resignations and 5,336,332 options
were exercised during the year.

Additionally, 603,000 options were granted to eligible employees under the
Scheme during the year. Accordingly 16,548,268 options remain outstanding
as of March 31, 2010. All options vest in a graded manner and those are to
be exercised within a specific period. The Company has used the intrinsic
value method to account for the compensation cost of stock to employees of
the Company. Intrinsic value is the amount by which the quoted market price
of the underlying share on the date prior to the date of the grant exceeds
the exercise price on the option.

Disclosures as required by Clause 12 of the SEBI Employees Stock Option
Scheme and Employee Stock Purchase Scheme Guidelines, 1999 are annexed to
this Report.

CORPORATE GOVERNANCE

Separate detailed chapters on Corporate Governance, Additional Shareholder
Information and Management Discussion and Analysis are attached herewith
and form part of this Report.

PUBLIC DEPOSITS

During F.Y. 2009-10, your Company has not accepted any deposits from the
public within the meaning of the provisions of the Non-Banking Financial
Companies (Reserve Bank) Directions, 1998.

FOREIGN EXCHANGE

The particulars regarding foreign exchange earnings and expenditure are
furnished at Item No. 14 & 15 in the Notes to the Accounts. Since the
Company does not own any manufacturing facility, the other particulars in
the Companies (Disclosure of Particulars in the Report of the Board of
Directors) Rules, 1998 are not applicable.

LISTING OF SHARES

The Company's shares are listed on National Stock Exchange of India Limited
(NSE) and Bombay Stock Exchange Limited (BSE).

DIRECTORS

Ministry of Finance, Government of India nominated Mr. G.C. Chaturvedi,
Additional Secretary, Department of Financial Services, as Director on the
Board of IDFC in place of Mr. Arun Ramanathan, Ex-Finance Secretary.
Accordingly, Mr. Arun Ramanathan ceased to be a Director with effect from
July 20, 2009.

The Board placed on record its appreciation of the invaluable guidance
provided by Mr. Arun Ramanathan to the Company.

The Board, at its meeting held on July 20, 2009, appointed Shri G.C.
Chaturvedi, as Director with effect from July 21, 2009 and he holds office
up to the date of the ensuing Annual General Meeting (AGM).

The Board, at its meeting held on July 20, 2009, appointed Mr. Donald Peck
as Additional Director with effect from July 21, 2009 and he holds office
up to the date of the ensuing AGM.

In accordance with the Articles of Association of the Company and
provisions of the Companies Act, 1956, Mr. Gautam Kaji, Mr. Dimitris
Tsitsiragos and Mr. Abdul Rahim Abu Bakar are retiring by rotation and
being eligible, offer themselves for re-appointment at the AGM.

The Board of Directors recommends appointment/re-appointment of all the
above Directors at the ensuing general meeting.

INTERNAL CONTROL SYSTEMS

The Company has in place adequate systems of Internal Control to ensure
compliance with policies and procedures. Internal Audits of all the units
of the Company are regularly carried out to review the internal control
systems. The Internal Audit Reports along with implementation and
recommendations contained therein are constantly reviewed by the Audit
Committee of the Board.

AUDITORS

Messrs Deloitte Haskins and Sells, Chartered Accountants, will retire as
the statutory auditors of the Company at the ensuing AGM.

The Board at its meeting held on April 27, 2010 has proposed their re-
appointment as Auditors to audit the accounts of the Company for the
financial year ending March 31, 2011.

Messrs Deloitte Haskins and Sells, the retiring auditors, have confirmed
that their re-appointment, if made, would be in conformity with the
provisions of Sections 224 and 226 of the Companies Act, 1956, as also
indicated their willingness to be re-appointed.

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors confirm that

+ In the preparation of the annual accounts, the applicable accounting
standards have been followed;

+ They have selected such accounting policies and applied them consistently
and made judgements and estimates that are reasonable and prudent, so as to
give a true and fair view of the state of affairs of the Company at the end
of the financial year and of the profits of the Company for the year;

+ They have taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of the
Companies Act, 1956, for safeguarding the assets of the Company and for
preventing and detecting fraud and other irregularities; and

+ They have prepared the annual accounts on a going concern basis.

ACKNOWLEDGEMENTS

IDFC has developed close relationships with the Ministry of Finance (MoF),
Banking Division (MoF), Ministry of Surface Transport, National Highways
Authority of India, Ministry of Power, Department of Telecommunications,
Ministry of Petroleum and other Ministries of the Government of India
involved with infrastructure development; Reserve Bank of India, Securities
& Exchange Board of India and regulatory bodies, TRAI, the Central
Electricity Regulatory Commission and State Electricity Regulatory
Commissions; the Planning Commission; IIT (Kanpur); IIM (Ahmedabad); the
State Governments and all IDFC's shareholders.

The Board of Directors wishes to gratefully acknowledge the assistance and
guidance received from all of them. IDFC could make the progress it has in
these years due to the dedication and creativity of its staff at all
levels.

The Board of Directors wishes to place on record their warm appreciation
for these efforts.

FOR AND ON BEHALF OF THE BOARD

DEEPAK S. PAREKH,
Chairman
Place: Mumbai
Date : May 21, 2010

PARTICULARS 2009-2010

1. Options outstanding as at
the beginning of the year 21,766,956

2. Options granted during the year 603,000

3. Pricing Formula Options may be
granted at a price
not less than the
face value per share.

Options have been granted
in the range of strike
price of Rs. 57.60
to 159.60

4. Options Vested 15,000,815

5. Options Exercised during the year 5,336,332

6. Total no. of shares arising as result
of exercise of Options 5,336,332

7. Options lapsed* 485,356

8. Variation in terms of Options None

9. Money realised by exerise
of Options (Rs.) 205,415,768

10. Total number of options in force 16,548,268

* Lapsed Options includes
options cancelled/lapsed

11. Diluted Earnings Per Share pursuant 7.74
to issue of shares on exercise of option
calculated in accordance with
AS 20 Earnings Per Share' (Rs.)

12. PRO FORMA ADJUSTED NET INCOME
AND EARNINGS PER SHARE

PARTICULARS RUPEES
Net Income

As Reported 10,128,373,718
Add: Intrinsic Value Compensation Cost 53,382,037
Less: Fair Value Compensation Cost (381,618,467)
Adjusted Pro Forma Net Income 9,800,137,288
Earning Per Share:Basic
As Reported (Rs.) 7.82
Adjusted Pro Forma (Rs.) 7.56
Earning Per Share: Diluted
As Reported (Rs.) 7.74
Adjusted Pro Forma (Rs.) 7.49

13. Weighted average exercise price of
Options granted during the year whose:

(a) Exercise price equals market price 101.09
(b) Exercise price is greater than market price NA
(c) Exercise price is less than market price NA

14. Weighted average fair value of Options
granted during the year whose:

(a) Exercise price equals market price 48.69
(b) Exercise price is greater than market price NA
(c) Exercise price is less than market price NA

15. Description of method and significant The fair value of the
assumptions used to estimate the fair value options granted has
of options: been estimated using
Black-Scholes option the pricing Model.
Each tranche of vesting
have been considered as
a separate grant for
the purpose of valuation.
The assumptions used
in the estimation of
the same has been
detailed below:

VARIABLES WEIGHTED AVERAGE
VALUES FOR ALL
GRANTS MADE DURING
THE YEAR

Stock Price (Rs.) 103.36
Volatility 66.30%
Risk free Rate 6.16%
Exercise Price (Rs.) 101.09
Time To Maturity (Yrs.) 3.10
Dividend yield 1.05%
Weighted Average Value (Rs.) 48.69

Stock Price:

Closing price on NSE as on the date of grant has been considered for
valuing the grants.

Volatility:

The historical volatility from the date of listing till the date of grant
has been considered to calculate the fair value.

Risk-free rate of return:

The risk-free interest rate being considered for the calculation is the
interest rate applicable for a maturity equal to the expected life of the
options based on the zero-coupon yield curve for Government Securities.

Exercise Price:

Price of each specific grant have been considered.

Time to Maturity:

Time to Maturity/Expected Life of options is the period for which the
Company expects the options to be live. The minimum life of a stock option
is the minimum period before which the options cannot be exercised and the
maximum life is the period after which the options cannot be exercised.

Expected divided yield:

Expected dividend yield has been calculated as an average of dividend
yields for three financial years preceding the date of the grant.

MANAGEMENT DISCUSSION AND ANALYSIS

Essentially, IDFC's business model is built on the strong foundation of its
domain knowledge and intellectual capital in the field of infrastructure
development. The Company utilises its deep understanding of risks and
opportunities associated with different projects across the various stages
of their project life-cycle. Based on this knowledge, IDFC devises
appropriate products and financing structures that are critical to
successful infrastructure financing. In doing so, IDFC constantly strives
to identify and deliver value propositions for all its stakeholders, while
mobilising domestic as well as global capital and channelling it for the
development of infrastructure in India.

Over the years, IDFC has steadily broadened its business activities to
cover a wide spectrum of services in the financial intermediation space.
With the basic focus on infrastructure, it has expanded from the primary
business activity of pure project financing and government advisory to
asset management (both private and public), loan syndication, corporate
advisory, investment banking, institutional brokerage and project
development. This expansion has been achieved through a mix of organic
growth and strategic acquisitions. The Company's consequential presence in
different, yet inter-linked, financial services has contributed
significantly in positioning IDFC as a complete solutions provider' in the
infrastructure finance space in India.

While being driven by the power of knowledge and innovation, the Company
realises the importance of excellence in execution to achieve sustained
growth in the highly competitive financial intermediation space.

In this respect, 2009-10 was an active year for IDFC. First, it had to work
on re-calibrating its tactical business positioning given the changes in
the macroeconomic environment after the global financial crisis of 2008-09.
Second, it initiated a major internal programme to integrate various
different businesses within the IDFC group to create a One Company' system
and culture across all its entities. In essence, having created the base
for the one-stop shop for infrastructure financing', the Company has
focused on integrating its different business activities to embark on the
next stage of growth.

THE EXTERNAL ENVIRONMENT AND IDFC

Global financial markets have recovered strongly in 2009 since their
troughs in the aftermath of the collapse of Lehman Brothers in middle of
2008. This recovery was spurred by improving economic fundamentals and
sustained policy support. Risk appetite has returned, equity markets have
improved, and capital markets have re-opened. As a result, prices across a
wide range of assets have rebounded sharply off their historic lows, as the
worst fears of investors of a collapse in economic and financial activity
have not materialised (see Chart A). Consequently, systemic risks have
continued to subside in the global financial system.

Despite substantive overall improvement, the repair of the financial system
is far from complete, and financial stability remains fragile. There are
still pressing challenges. The first major challenge is to restore the
health of the global banking system, especially credit provisioning. To do
so, it is necessary that the de-leveraging processes under way in the
global banking systems remain orderly and do not require such large
adjustments as to undermine the recovery. The process of absorbing the
credit losses is still under way, supported by ongoing efforts at raising
capital.

At the same time, new risks are emerging as a result of the extraordinary
support provided by the government interventions to rescue economies.
Indeed, unprecedented policy support has come at the cost of a significant
increase of risk to sovereign balance sheets and a consequent increase in
sovereign debt burdens that raise risks for financial stability in the
future. Greece is a case in point. Levels of deficit financing and public
debt in the United Kingdom, Spain, Italy and Portugal are high, and
potentially prone to downside risks.

While bank flows to emerging markets are yet to recover, the rebound in
portfolio inflows has supported a rally in emerging market assets,
particularly equities, and to a lesser extent real estate. Concerns have
been raised that these inflows can lead to asset price bubbles and put
pressure on exchange rates.

There is no doubt that IDFC is well positioned to benefit from the renewed
risk appetite in the global financial market and the world's confidence in
emerging countries like India.

Equally, continuing uncertainties in the system meant that the types of
global capital available in 2009-10 in terms of investment tenure and costs
have not been wholly in line with IDFC's business requirements.

As a result, during 2009-10, IDFC concentrated largely on mobilising and
sourcing capital from India.

As far as the real economy was concerned in 2009-10, India displayed
resilience and strength to withstand the global turmoil, but after a fairly
serious scare in 2008-09.

After three continuous years of over 9% growth, shrinking global demand and
associated fall in business confidence had reduced India's annual GDP
growth rate to 6.7% in 2008-09. More importantly, the prevailing economic
conditions resulted in a major dip in investor confidence. Consequently,
private sector investment in infrastructure reduced significantly. This is
evident from the data presented in Chart B, where infrastructure growth, as
measured by the core infrastructure index, reduced to 3% in 2008-09.

The sluggishness continued in the beginning of 2009-10 especially leading
up to the general election. With the election throwing up a stable
Government, there was renewed confidence amongst investors in India.
Thereafter, we have witnessed a steady pick-up in economic and investing
activity, especially since the middle of the second quarter. The estimate
from the Central Statistical Organisation (CSO) suggests that GDP growth
for 2009-10 will be 7.2%. It may even touch 7.5%. Whatever the number, it
is clear that India has recovered, and is poised to be back on its 8% plus

annual growth trajectory. In line with improved economic activity and
confidence in the Indian economy, infrastructure growth has also improved
from 3% in 2008-09 to 5.4% in 2009-10 (April 2009 to January 2010).

Immediately after the elections, the ministers who assumed charge took some
time in assessing the situation in their various ministries. Subsequently,
the Government of India has started actively pushing large scale
infrastructure development in key sectors. As a result, Q4 2009-10
witnessed a quantum jump in activity in the infrastructure sector.

Given this macroeconomic backdrop,

IDFC adopted a well-calibrated business strategy, which evolved during the
course of the year. In the initial part of the year, the Company's plan was
fairly cautious as it gauged the developments in business environment
carefully. The focus was on:

* Conserving capital and maintaining healthy capital adequacy norms.

* Focusing on generating more profits out of its existing businesses.

* Preserving asset quality.

* Aggressively contain costs.

Essentially, it meant that in the first part of 2009-10, IDFC's primary
objective was to squeeze out greater profits while carefully calibrating
balance sheet growth. It performed creditably during this phase. In the
first nine months of 2009-10, the consolidated balance sheet grew by 13%,
while Profit After Tax (PAT) increased by 42%.

As the year progressed, while the Company maintained these strategic goals,
the market dynamics changed and there were far greater opportunities for
infrastructure finance.

Although IDFC maintained an eye of caution and capital cushions in its
balance sheet, the latter part of the year saw the Company being much more
aggressive in mobilising capital and pushing for growth. Today, IDFC
believes that it has built a strong foundation and, if the present trends
in the infrastructure sector were to continue, it is poised for rapid
growth.

IDFC'S PERFORMANCE HIGHLIGHTS

The Company's business performance is given in Box 1.

There has been a significant increase in operating income both from direct
lending activities and from the Company's other businesses. The over 21%
growth in net interest income has been a result of growth in the loan book
as well as better spreads. With the return of confidence in the Indian
stock markets and renewed corporate activity in fund raising and Mergers
and Acquisitions (M&A), there has been a major revival in non-interest
income, which increased by 55% in 2009-10.

While focusing on growth, IDFC maintained its focus on the quality of
assets. As of March 31, 2010, IDFC had only 0.17% net non-performing assets
(NPA). It had a capital adequacy ratio of 20.51% as of March 31, 2010, of
which 17.36% is Tier I capital.

As reported in last year's annual report, given liquidity concerns, a
particular rating agency had taken a harsh stance regarding the capital
cushion required to sustain the Company's business. Subsequently, there was
a ratings downgrade.

IDFC and its Board of Directors, however, had enough confidence in the
adequacy of its internal accruals to drive growth, and did not believe in
the need to raise capital in an unsure market to meet the rating agency's
demand for an exceptionally high capital requirement. The Company's
strategy has borne fruit. Growth was not hampered in 2009-10 and there was
adequate capital on the balance sheet. This fact was further strengthened
by ICRA, and FITCH which, in August 2009, reaffirmed the highest credit
quality ratings to various debt instruments of the Company.

REGULATORY DEVELOPMENTS

During 2009-10, there were some regulatory developments which positively
influenced IDFC's business.

At the beginning of the year, the risk weight for bank's exposure to Non-
Banking Financial Companies (NBFCs) was 120%. During the course of the
year, Reserve Bank of India (RBI) reduced this to 100%, releasing more bank
funds for NBFC financing. Thereafter, RBI linked the risk weights of banks'
exposure to NBFCs to the credit rating assigned to the NBFC by external
credit assessment institutions. This has served well for NBFCs like IDFC,
which has the very best credit ratings.

Thereafter, in the last quarter of 2009-10, RBI issued a notification
introducing a new category of NBFC-namely, Infrastructure Finance Companies
(IFCs). This is in addition to the existing categories of NBFCs, i.e. Asset
Finance Companies (AFCs), Loan Companies (LCs) and Investment Companies
(ICs).

According to RBI, to be recognised as an IFC, NBFC should deploy a minimum
of 75% of total assets in infrastructure. In addition, such NBFC must have
net owned funds of at least Rs.300 crore (Rs.3 billion), and a minimum
credit rating A' or equivalent from CRISIL, FITCH, CARE, ICRA or
comparable rating by any other accrediting rating agencies.

IDFC is well positioned to satisfy all these criteria, and is ideally
suited to become an IFC. The re-classification as an IFC has several
benefits.

* The exposure of a bank to IFCs has been enhanced to 20% of its capital
funds.

* IFCs need to maintain a CAR of 15%, of which at least 10% should comprise
Tier I capital.

IDFC comfortably meets this requirement today; and will do so in the
future.

* IFCs will be allowed to do more business with projects and business
groups. Exposure of NBFCs to a single project and a single business group
are limited to 20% and 35% respectively of their net owned funds. However,
in the case of IFCs, exposure to a single project and a single business
group have been enhanced to 25% and 40% respectively of their net owned
funds.

Therefore, the positioning of IDFC as an IFC will be a significant
development in its effort to generate significant balance sheet growth from
2010-11.

THE BUSINESS PLATFORMS

While fundamentally focusing on the business of infrastructure financing,
IDFC's business structure and organisation has grown and developed over the
years. Today, the businesses can be classified under four broad platforms
based on the fundamental nature of the underlying activities. These are:

1. Corporate Finance and Investment Bank

This includes the own balance sheet business of project finance, principal
investments and treasury. It also includes the investment banking business
of IDFC Capital and the institutional brokerage business of IDFC
Securities.

* Project Finance

This is IDFC's core business of lending to infrastructure projects. It is
capital intensive and focuses on managing the loan book. While this creates
the Company's base income stream, it also provides IDFC with the bridge to
clients to build larger and wider customer engagement.

* Principal Investments and Treasury

Principal investments comprise two distinct kinds of activities. First,
there are strategic investments that are made by the Company to strengthen
or develop any of its business platforms. Historically, this includes
investments for the acquisitions like IDFC-SSKI (now renamed IDFC
Securities) and IDFC-AMC. These are long term in nature and are not meant
for direct returns. Second, there are the commercial investments, which
typically supplement the lending business by infusing equity into projects.
These could include investment in the Company's own private equity and
project equity funds as well as selected direct investments in projects or
companies. These are meant to create value appreciation over a period of
time with the Company generating actual returns. The treasury function is
primarily the back-bone for project financing. It focuses on liquidity
management to provide sufficient funds at optimal costs. In addition, it
also generates returns by taking calls in the fixed income trading space.

* Investment Banking and Institutional Brokerage

These businesses were earlier under the IDFC-SSKI platform. The investment
banking business has been restructured under IDFC Capital, while the
institutional brokerage business is now undertaken by IDFC Securities.

With the investment banking business focusing on advisory fees and the
institutional brokerage business generating transaction based brokerage
fees, the returns are generally high but volatile, given prevailing
conditions in the capital market.

2. Public Markets Asset Management

This primarily comprises IDFC's mutual funds business, which is operated
through the IDFC Asset Management Company Limited (IDFC AMC). This business
was acquired from Standard Chartered Bank. Here, the Company manages
different mutual fund products for institutional and retail investors.
Income is generated through asset management fees and the focus is on
growing the assets under management by offering suitable products and
channelling private and corporate savings into the debt and equity markets.

3. Alternative Asset Management

This includes private asset management and pure project management. These
are not capital intensive and returns are typically in the form of fund
management fees-which have a fixed element and may be supplemented by a
carry'.

1. Return on Average Total Assets (RoA) tree

% of Average Total Assets
2009-10 2008-09

Infrastructure 3.3% 2.6%
Treasury 0.3% 0.5%
Net Interest Income 3.6% 3.1%
Principal Investments 1.1% 0.6%
Asset Management 0.9% 0.7%
Investment Banking 0.6% 0.4%
Infrastructure loan related fees 0.5% 0.4%
Non-interest Income 3.0% 2.1%
Miscellaneous Income 0.1% 0.1%
Operating Income 6.7% 5.3%
Operating Expenses 1.8% 1.2%
Provisions 0.4% 0.5%
Profit Before Tax 4.6% 3.5%
Provision for tax, Profit in Associate
Co., Minority Interest etc. 1.2% 0.9%
Profit After Tax 3.4% 2.6%

* Private Asset Management

It includes the large private equity and project equity funds that the
Company has mobilised in partnership with other financial institutions. It
also includes a fund of funds business that operates out of Singapore.

* Project Management

IDFC has extended its expertise in portfolio management outside the pure
financial domain by starting the IDFC Projects Company in 2008-09. Here,
the Company is focusing on leveraging its core strength of understanding
project risk-return profiles, manage large and complex projects, build
partnerships, enhance in-house skills, and develop credibility and hand-
hold partners from end to end.

4. Advocacy and Nation Building

While focusing on generating returns, IDFC provides leadership in
developing cutting-edge concepts and frameworks in the infrastructure space
in India. Through the IDFC Foundation, the Company plays a leading role in
policy formulation and advocacy, institutional capacity building to
structure public-private partnerships, providing government transaction
advisory services and promotion of inclusive infrastructure through
corporate social responsibility initiatives. These activities enhance
IDFC's knowledge base, reinforce it as a credible player in the
infrastructure sector and fulfill the Company's wider social goals.

These business platforms are well supported by a shared services platform
that includes Information Technology (IT), Human Resource (HR), Compliance,
Secretarial Services, Risk Management and Accounts.

RETURN ON ASSETS (ROA)

As a financial intermediary, the return generated on assets is a
fundamental measure of performance for IDFC. While each of the different
business platforms has different capital intensities, the returns they
generate on the total balance sheet of the Company are critical in
determining IDFC's efforts at shareholder value creation. Table 1 gives the
RoA tree for IDFC in 2009-10.

Contributions of almost all businesses, as a % of average total assets,
increased significantly during FY 2009-10. Contribution from pure lending
activities measured as Net Interest Income from infrastructure increased
from 2.6% in 2008-09 to 3.3% in 2009-10.

Increased spreads reflective of the benign interest rate environment
through most of 2009-10 and increased traction in our lending business were
responsible for this enhanced contribution. The Net Interest Income from
treasury declined from 0.5% to 0.3% on account of the challenging interest
rate environment that we were in.

Total Net Interest Income increased from 3.1% in 2008-09 to 3.6% in 2009-
10.

Non-Interest Income capturing contributions of our fee based businesses and
principal investing increased from 2.1% to 3% across the two periods.
Respective contributions from principal investing, asset management,
investment banking & institutional broking and loan related &other fees
increased from 0.6%, 0.7%, 0.4% and 0.4% in 2008-09 to 1.1%, 0.9%, 0.6% and
0.5% respectively in 2009-10.

Operating income increased from 5.3% to 6.7%. The mix of Net Interest
Income to Non-Interest Income was about 55:45 reflecting increased momentum
in the lending business. It also captures the true diversification of our
business model and how businesses requiring varying intensity of capital
feed into the overall operating income.

Operating expenses increased from 1.2% in 2008-09 to 1.8% in 2009-10
largely accounted for by the increased traction in the market facing
businesses; distribution, marketing, branding and product spend in our
mutual fund business; and the changing compensation algorithm for the
consolidated platform as a whole. Provisions were at 0.5% and 0.4% across
the two periods.

The Profit Before Tax increased from 3.5% in 2008-09 to 4.6% in 2009-10.
Taxes etc., increased from 0.9% to 1.2%. The Profit After Tax, defined as
the Return on Assets, increased from 2.6% in 2008-09 to 3.4% in 2009-10.
This would possibly be amongst the highest in the financial services
landscape in India.

We now move on to greater details of the Company's businesses in 2009-10.

CORPORATE FINANCE/INVESTMENT BANK

This includes project finance, principal investments, treasury operations,
investment banking and institutional brokerage.

PROJECT FINANCE

In project finance, IDFC lends to customers through different financial
instruments like corporate loans, project loans, loans against shares,
subordinated debt, mezzanine finance and equity.

In line with the focus on creating a more stable asset base, the share of
loans and debentures in IDFC's total exposure has increased from 88.7% as
on March 31, 2009 to 91.2% as on March 31, 2010, while that of equity and
preference shares have reduced from 8.6% as on March 31, 2009 to 6.6% as on
March 31, 2010. Within loans, too, loans against shares have reduced from
6.1% as on March 31, 2009 to 3.3% as on March 31, 2010.

The developments in the infrastructure lending business are in line with
the business environment. As Chart C shows, the first three quarters of
2009-10 saw a steady growth in both gross approvals and gross
disbursements. With greater opportunities in the market, there has been a
further spurt in gross approvals in Q4 2009-10. In fact, gross approvals
doubled from Rs. 6,648 crore in Q3 2009-10 to Rs.13,892 crore in Q4, 2009-
10.

As is expected, when there is a spurt in new project opportunities, there
is initially a flurry of approvals, while disbursements lag behind. This
has been true for IDFC as well. However, it is important to note that
disbursements, too, have started picking up. Disbursements increased by 64%
in Q4 2009-10 over Q3, 2009-10.

Thus, there has been good growth in the project finance business in 2009-
10; more importantly, the trend in approvals and disbursements indicates
the presence of a significant pipeline of opportunities for IDFC to grow
its loan book meaningfully in the next financial year.

* Annual gross approvals, including equity and non-funded assistance,
increased by 195% to Rs.30,442 crore (Rs.304 billion) in 2009-10, while net
approvals grew by 326% to Rs.21,228 crore (Rs.212 billion).

* Annual gross disbursements, including equity, rose by 60% to Rs.12,962
crore (Rs.130 billion) in 2009-10, while net disbursements grew from a
negative Rs.382 crore [(-) Rs.3.8 billion] in 2008-09 to Rs.4,939 crore
(Rs.49 billion) in 2009-10.

* Net interest income from infrastructure lending activities increased by
35% from Rs.758 crore (Rs.7.6 billion) in 2008-09 to Rs.1,021 crore
(Rs.10.2 billion) in 2009-10.

These activities led to a 22% increase in the net loan book from Rs.20,596
crore (Rs.206 billion) in 2008-09 to Rs.25,031 crore (Rs.250 billion) in
2009-10.

IDFC's project finance business concentrates on four infrastructure sectors
- Energy; Transportation; Telecom & IT and Industrial, Commercial &
Tourism.

As Chart D shows, while its share has decreased slightly from 40.6% in
2008-09 to 38.3% in 2009-10, Energy still comprises the largest loan book
exposure. The share of Telecom and IT has increased significantly from
10.9% in 2008-09 to 24.4% in 2009-10, making it the second largest sector.
This is followed by Transportation, whose share has also dropped from 23.8%
in 2008-09 to 19.8% in 2009-10. While that of Industrial, Commercial and
Tourism has reduced from 16.4% in 2008-09 to 10.4% in 2009-10. The share
of Others', which include new plays in steel and cement, has decreased.
For good reason, with improvements in the business environment, IDFC has
refocused in financing its core infrastructure segments.

ENERGY

India continues to have a huge power supplydemand deficit, and the
Government of India is actively pushing power projects using the Private
Public Partnership (PPP) route. Of late, the government has accelerated its
efforts in large scale power projects, which offers larger opportunities
for financing for companies like IDFC.

On the power generation front, while thermal power remains the dominant
area, IDFC also has been pursuing hydro-electric projects. Renewable energy
generation is another area where the Company has been actively partnering
players in the wind energy space.

* As on March 31, 2010, IDFC's total exposure in the energy sector was
Rs.16,800 crore (Rs.168 billion).

* Gross approvals increased by 319% from Rs.2,180 crore (Rs.22 billion) in
2008-09 to Rs.9,131 crore (Rs.91 billion) in 2009-10.

* Gross disbursements rose by 120% from Rs.1,865 crore (Rs.19 billion) in
2008-09 to Rs.4,112 crore (Rs.41 billion) in 2009-10. Chart E plots the
growth in net approvals and net disbursements in the energy sector in 2009-
10 over 2008-09.

TRANSPORTATION

In transportation, IDFC works on the financing of roads, civil aviation,
airports, ports, container terminals, and gas and oil pipelines. Thanks to
the active involvement of the new Minister for Surface Transport, the
national highways programme got a fillip in the latter part of 2009-10.
With a vision that focuses on national highway development at the rate of
20 kms a day instead of the close to 5 kms being developed Vemagiri Power
Generation Limited 388 MW Gas based Power Plant per day as of now, a large
number of projects are in the pipeline. There is also a paradigm shift away
from awarding small packages covering short road sections to longer
stretches, with significantly larger package sizes. Much of this activity
is reflected in the increase in approvals in this sector, while gross
disbursements are gradually picking up.

* As on March 31, 2010, IDFC's total exposure in the transportation sector
was Rs.8,676 crore (Rs.87 billion).

* Gross approvals increased by 213% from Rs.1,567 crore (Rs.16 billion) in
2008-09 to Rs.4,912 crore (Rs.49 billion) in 2009-10.

* Gross disbursements grew by 21% from Rs.1,476 crore (Rs.15 billion) in
2008-09 to Rs.1,793 crore (Rs.18 billion) in 2009-10. Chart F plots the
growth in net approvals and net disbursements in transportation sector in
2009-10 and 2008-09.

TELECOMMUNICATION AND IT

While telecommunication in today's India is fairly mature, comprising some
very large players who have strong balance sheets, there is opportunity in
financing the new entrants that were awarded licenses in 2007-08 and are
poised for accelerated pan-India growth. IDFC has been leveraging this
customer base, while focusing on other opportunities in the telecom
infrastructure space, especially telecom towers. IDFC managed to secure
some large ticket size deals in this space during 2009-10, which has
significantly increased the Company's exposure in this sector. In addition,
going forward, there are opportunities expected, post the 3G auctions.

* As on March 31, 2010, IDFC's total exposure in the telecommunication and
IT sector was Rs.10,705 crore (Rs.107 billion).

* Gross approvals rose by 199% from Rs. 4,150 crore (Rs.42 billion) in
2008-09 to Rs. 12,401 crore (Rs.124 billion) in 2009-10.

* Gross disbursements increased by 27% from Rs. 2,885 crore (Rs.29 billion)
in 2008-09 to Rs. 3,670 crore (Rs.37 billion) in 2009-10. Chart G plots the
growth in net approvals and net disbursements in the Telecommunication and
IT sector in 2009-10 and 2008-09.

COMMERCIAL, INDUSTRIAL INFRASTRUCTURE, TOURISM AND OTHERS

Given the uncertainties in the real estate sector-primarily commercial real
estate-IDFC has been cautious in this segment. However, in a calibrated
manner, and based on the past record of various promoters, the Company
continues to invest in this space.

* As on March 31, 2010, IDFC's total exposure in the Commercial, Industrial
infrastructure sector, tourism and others was Rs.5,638 crore (Rs. 56
billion).

* Gross approvals increased by 78% from Rs.1,874 crore (Rs.19 billion) in
2008-09 to Rs.3,336 crore (Rs.33 billion) in 2009-10.

* Gross disbursements grew by 89% from Rs.1,454 crore (Rs.15 billion) in
2008-09 to Rs.2,742 crore (Rs.27 billion) in 2009-10. Chart H plots the
growth in net approvals and net disbursements in the commercial and
industrial infrastructure sector in 2009-10 as well as 2008-09.

PRINCIPAL INVESTMENTS

Principal investments are directly made from the Company's own balance
sheet, which form part of proprietary investments. There are four types of
investments in this portfolio:

* Strategic investments, where IDFC picks up stake in entities to further
strengthen its business offering or for some strategic purpose that is
central to the Company's long term objectives. In 2009-10, no investments
were made on this front.

* Financial investments, includes investments in National Stock Exchange of
India Limited (NSE), Securities Trading Corporation of India Limited (STCI)
and Asset Reconstruction Company of India Limited (ARCIL).

* Investment in venture capital units, for funds which are sponsored and
managed by IDFC.

* Infrastructure investments, which are now generally made as co-
investments alongside the funds under the Company's management or in deals
that do not meet the funds minimum size threshold.

Total outstanding disbursements in principal investments increased by about
20% in 2009-10.

* As on March 31, 2010, total exposure on IDFC's equity asset book,
excluding strategic investments, was Rs.3,153 crore (Rs.32 billion).

* Outstanding disbursements, on the equity book, increased by 19% from
Rs.1,724 crore (Rs.17 billion) on March 31, 2009 to Rs.2,057 crore (Rs.21
billion) on March 31, 2010. Of this, Rs.352 crore (Rs. 3.5 billion) was
financial equity; Rs.1,082 crore (Rs.11 billion) was infrastructure equity;
and Rs.400 crore (Rs.4 billion) was in the form of venture capital.

* Income from the Company's principal investments, which includes dividends
and capital gains, increased by 81% from Rs.184 crore (Rs.2 billion) in
2008-09 to Rs.333 crore (Rs.3 billion) in 2009-10.

TREASURY

The treasury function is bifurcated into two areas. It principally
maintains sufficient liquidity to support the project finance operations.
During 2009-10, bulk of the emphasis was on this area. With the loan book
growing significantly, maintaining liquidity with reasonable cost of funds
was a challenge. Focusing on domestic capital markets, IDFC went into
serious fund raising. In doing so, it also managed to lower the cost of
funds on the balance sheet. There was also the challenge posed by the fact
that the market was characterised by near-term money with falling interest
rates, while IDFC's assets were mostly in the form of longer term finance.
The Company, however, still managed to expand its balance sheet by
maintaining effective duration relationships between its assets and
liabilities.

As on March 31, 2010, the asset duration was 1.95 years while the liability
duration was 1.75 years. This bears testimony to the business' ability to
forecast and take appropriate calls in the fixed income markets without
taking undue risks.

Uncertainties on the length of liquidity and a falling interest rate system
meant that the proprietary treasury book (where investments are made in
fixed income securities for returns) remained constrained.

* Treasury assets decreased by 11% from Rs.5,672 crore (Rs.57 billion) on
March 31, 2009 to Rs.5,045 crore (Rs.50 billion) on March 31, 2010.

* Net interest income from treasury operations decreased by 41% from Rs.164
crore (Rs.1.6 billion) in 2008-09 to Rs.96 crore (Rs.1 billion) in 2009-10.

INVESTMENT BANKING AND INSTITUTIONAL BROKERAGE

This includes the businesses of IDFC Capital and IDFC Securities, which was
earlier under IDFC-SSKI platform. It utilises in-house expertise and brand
positioning to provide a gamut of advisory services across different areas
like debt syndication, structured finance, corporate debt and equity market
advisory. Total income from this platform increased by 59% from Rs.115
crore (Rs.1.2 billion) in 2008-09 to Rs.183 crore (Rs.1.8 billion) in 2009-
10. With an improvement in the business environment, there was an increase
in opportunities in the investment banking space.

IDFC Capital undertook the first QIP offer in India for 2009-10.
Subsequently, it played a leading role in similar deals that also included
debt and PE placements. By March 31, 2010, it was ranked No. 2 in terms of
number of deals and No.3 in terms of amount raised by private sector in
equity market during the year 2009-10. As a result, income from investment
banking and advisory fees increased by 118% from Rs.51 crore (Rs.0.5
billion) in 2008-09 to Rs.111 crore (Rs.1.1 billion) in 2009-10.

On the institutional brokerage front, too, there was a growth in the level
of activity in 2009-10 compared to 2008-09. While opportunities increased,
competition was fierce. As a result, IDFC Securities did lose some market
share. However, with greater volumes, there was an increase in brokerage
income. Institutional brokerage income rose by 13% from Rs.64 crore (Rs.0.6
billion) in 2008-09 to Rs.72 crore (Rs.0.7 billion) in 2009-10.

PUBLIC MARKETS ASSET MANAGEMENT

This business is administered through the asset management company-IDFC AMC
and IDFC Investment Advisors. The primary business is IDFC mutual fund,
which was acquired in 2008 from Standard Chartered Bank. Through concerted
efforts at pushing sales by creating and nurturing wider and improved
channels, offering a larger basket of products and targeting a more varied
customer base, IDFC has grown its mutual fund business. The assets under
the Mutual Fund's management increased from Rs.14,362 crore (Rs.144
billion) as on March 31, 2009 to Rs.25,775 crore (Rs.258 billion) as on
March 31, 2010. With this growth, IDFC Mutual Fund has the tenth largest
AUM amongst mutual funds in India. Several new products were introduced
during the year, which were well accepted.

IDFC Investment Advisors targets High Net worth Individuals (HNIs) for
personal wealth management. This channel has an AUM of Rs.433 crore.

Total operating income of IDFC AMC and IDFC Investment Advisors increased
by 89% to Rs.133 crore (Rs.1.3 billion) in 2009-10.

ALTERNATIVE ASSET MANAGEMENT

This includes private equity, project equity, projects and fund of funds.
As of March 31, 2010, the total AUM across private equity and project
equity business was Rs.9,200 crore (US$ 2 billion at exchange rate of
US$1=Rs.44.94).

PRIVATE EQUITY

IDFC's private equity business focuses on generating returns by providing
equity-based risk capital to early stage as well as fast growing
infrastructure companies. This business is undertaken through its wholly-
owned subsidiary, IDFC Private Equity Company Limited (IDFC Private
Equity').

IDFC Private Equity manages a corpus of Rs. 5,992 crore through three
funds-India Development Fund (the Fund I), IDFC Private Equity Fund II (the
Fund II) and IDFC Private Equity Fund III (the Fund III).

The Fund I, which closed in March 2004 with capital commitments of Rs.844
crore, has paid back original corpus to the investors. There were two full
exists from the investments of the Fund I. The Fund II, which closed in
June 2006 with capital commitments of Rs.1,988 crore, has been entirely
invested and focuses on portfolio management and exits. The Fund III, which
closed in September 2008 with capital commitments of Rs.3,160 crore,
focuses on portfolio management and new deals.

As of March 31, 2010, total assets under IDFC Private Equity's management
were US$ 1.2 billion or Rs.5,364 crore (Rs.54 million at exchange rate of
US$1 = Rs.44.94). Given the low levels of activity, operating income was
maintained at Rs.99 crore (Rs.1 billion).

During the year, IDFC Private Equity won three awards: (i) the Asian
Infrastructure Fund Manager of the Year award by Infrastructure Investor,
(ii) the Asian Infrastructure Deal of the Year award by Infrastructure
Investor and (iii) the Indian Private Equity Fund of the Year Award by
Private Equity International.

PROJECT EQUITY

IDFC's project equity invests in operating assets of mid-size projects.
Much of these investments are in the post-construction and stabilisation
stage, with the underlying assets getting aggregated and bundled into a
holding company before being sold off at better valuations. These have
lower risk-return profiles compared to the pure private equity plays.

IDFC, along with partners, achieved final closure of the India
Infrastructure Fund in June 2009 with total commitments of Rs.3,837 crore
(US$ 875 million at exchange rate of US$1=Rs.44.94). IDFC has invested
US$100 million in this Fund. The Fund has called 36.1% of its capital
commitments as of March 31, 2010.

In line with market conditions in 2009-10, there were no further efforts in
raising more capital. Instead, the focus was on doing deals. The Fund has
committed 45.6% of its total corpus to portfolio companies as of March 31,
2010.

Operating income from Project Equity increased by 45% to Rs.64 crore in
2009-10.

IDFC PROJECTS

IDFC started the IDFC Projects Company in 2009. This is the Company's foray
into becoming an infrastructure developer. In the project development
space, this entity believes in developing its businesses based on the
following:

* Leverage core strengths Utilise the internal strength of better
understanding of risk profiles, bidding strategies, and established
contract and implementation structures. Create value through use of
appropriate financial instruments and structures at various stages of the
projects. Focus on projects which have first mover and strategic
advantages, and use such projects to enter other initiatives.

* Develop larger and more complex projects Occupy niche areas of large
capital intensive projects which are complex in nature but have long term
stable cash flows. Participate in more number of projects via the bidding
route through which most opportunities get generated.

* Build partnerships Forge successful relationships with leading national
and international partners and achieve domain expertise and technical
collaboration. Seek co-developers who have goals, strategies and values
consistent with those of IDFC Projects.

* Establish credibility Build a reputation for efficient operations and
fair practice.

IDFC Projects has forged successful relationships with national and
international organisations for domain expertise and technical
collaboration. In 2009-10, it successfully bid for setting up a 1,050 MW
coal fired power plant for Dheeru Powergen Private Limited (DPPL) at
village Dhanras, Tehsil Katghora, in the Korba district of Chhattisgarh in
India. DPPL is a joint venture company between IDFC Projects Limited and
Ranhill Dheeru Malaysia (RDM), Malaysia.

IDFC GLOBAL ALTERNATIVE

Based in Singapore, IDFC Global Alternatives (IDFC-GA) is a global emerging
markets private equity fund-of-funds business. IDFC-GA will focus mainly on
Asia and is currently in active fund raising mode.

IDFC FOUNDATION

IDFC's development agenda, which earlier was promoted through various parts
of the platform, is now pursued through a dedicated division of the
Company, namely, IDFC Foundation. The Foundation's activities are overseen
by a separate Governing Board and comprise four core activities - Policy
Advocacy, Capacity Building, Government Transaction Advisory Services and
Corporate Social Responsibility (CSR) initiatives.

POLICY ADVOCACY

Since inception, IDFC has played a pivotal role in advising governments at
various levels in developing policy, legal and regulatory frameworks that
enable the sustainable growth and development of various infrastructure
sectors, provide affordable and high quality services to users and
encourage private investment in infrastructure. While much progress has
been made in telecommunications, roads, ports and airports, the Foundation
now focuses on energy, especially in the global context of reduced carbon
emission commitments, urban development, rail services, health care and
education. To guide these initiatives, the Foundation has constituted
dedicated advisory boards-Energy Advisory Board and Urban Advisory Board
comprising prominent and knowledgeable persons in these areas.

In the energy sector, the focus continues to be on promoting initiatives to
minimize losses in energy distribution as well as in enlarging the scope of
power generation from cleaner and renewable sources of energy, to promote
low carbon use. In the urban sector, the focus is on areas such as
sustainable urban planning and development through creative ways of using
land to support urban growth, water and waste water management, solid waste
management and public transportation systems. Specific initiatives are
already underway to set up a centre for low carbon, develop a model PPP
programme for rail development, promote guaranteed land title systems and
review the central government's Jawaharlal Nehru National Urban Renewal
Mission (JNNURM) programme.

The policy advisory group is also developing an infrastructure index that
would enable comparison of infrastructure services across different states.
Together with the Indian Institute of Management, Ahmedabad and Indian
Institute of Technology, Kanpur, under the auspices of the 3-i Network, the
group prepares the India Infrastructure Report every year, which has
emerged as a standard reference document for infrastructure in the country.

CAPACITY BUILDING INITIATIVES

One of the constraints to the development of infrastructure through public
private partnerships (PPPs) is the lack of capacity in government
departments, especially in states and urban local bodies in preparing
projects under PPP frameworks. To help address this issue, IDFC has set up
the India PPP Capacity Building Trust as a dedicated entity that would
provide capacity building and training to government officials in the area
of PPPs.

The Trust has been appointed by the Department of Economic Affairs,
Ministry of Finance, Government of India as the executing agency for
implementing a national capacity building programme for training officials
of state governments, urban local bodies and select Central government
departments, through existing institutes of public administration across
seven states and three central training institutes. The first phase of this
programme is largely funded by KfW Development Bank.

The Trust is currently engaged in developing a syllabus, training material,
course outlines and programmes for the training of trainers from these
institutes, which is expected to result in improved capacities in preparing
and managing PPP projects across various infrastructure sectors.

In the meantime, several capacity building programmes have already been
conducted across various states, some of which, focusing on the urban
sector, have been in partnership with the Administrative Staff College of
India, Hyderabad. A few programmes have also been conducted overseas, in
the neighbouring countries of Nepal and Sri Lanka, on behalf of the United
Nations Development Programme (UNDP), Nepal and the Commonwealth
Secretariat.

GOVERNMENT TRANSACTION ADVISORY SERVICES

The Foundation continues to be engaged in providing transaction advisory
services to governmental departments and agencies engaged in
infrastructure, with a particular focus on state highways, urban services,
transport systems, railways, healthcare and education. The objective is to
promote private sector engagement in areas that would substantially benefit
from the flow of private capital and management expertise, resulting in
vastly improved standards of service for users. For this purpose, IDFC
consciously focuses on states hitherto considered 'difficult', but which
now demonstrate a propensity to change. This activity clearly reflects the
Company's position as a pioneer, careful risk taker and thought leader in
infrastructure.

A substantial part of this work is accomplished through IDFC's joint
ventures with a few state governments, namely Infrastructure Development
Corporation (Karnataka) Limited (iDeCK), Uttarakhand Infrastructure
Development Company Limited (U-DeC) and Delhi Integrated Multi-Modal
Transit Systems Limited (DIMTS). While iDeCK and U-DeC focus on all areas
of infrastructure across the respective states, DIMTS assists in the
development and improvement of public transport systems in Delhi. It has
been generally acknowledged that the involvement of these agencies have
made a substantial difference to the way PPPs have been used to develop
infrastructure in these states.

CORPORATE SOCIAL RESPONSIBILITY

Corporate Social Responsibility (CSR) at IDFC is focused on making our
business practices more environmentally and socially responsible. This is
effected by (i) assessing and mitigating the environmental & social impacts
of our investments in infrastructure projects, and (ii) minimizing the
environmental impact and carbon footprint of our operations through
resource efficiency & conservation. CSR also includes an active
volunteering program aimed at increasing our employees' environmental and
social sensitivities, besides high standards of corporate governance,
maintaining our reputation for ethical and fair business practices and
improving transparency in our interactions with our stakeholders.

In FY 2010, IDFC became India's first signatory to the Principles for
Responsible Investment (PRI), a global, collaborative, investor network
initiated by the UN in 2006, which aims to help investors integrate
consideration of environmental, social, and governance (ESG) issues into
their investment decision-making and ownership practices, and thereby
improve long-term returns to beneficiaries. IDFC has joined the PRI under
the category 'Investment Manager' for its private equity, project equity
and fund-of-funds businesses. IDFC continues to be a member of the United
Nations Global Compact and a signatory investor and respondent to the
Carbon Disclosure Project.

IDFC launched its internal environment policy aimed at minimizing its
environmental impact and carbon footprint under the 'Go Green' initiative.
It is on course for obtaining US Green Business Council's LEED Gold
Certification (Commercial Interiors) for its new office at Chennai and
(possibly India's first) certification for an Energy-Efficient Data Centre
from TUV Rhineland, Germany.

The Foundation also initiated the Inclusive Infrastructure Fund, a small
corpus formed out of its own funds for funding social enterprises or
innovative environmental projects. The Fund made its first equity
investment in Ziqitza Healthcare Ltd., a company that provides emergency
response ambulance services ('Dial 1298' in Mumbai) under an innovative
business model where better-off patients (i.e. those admitting to private
hospitals) cross-subsidize poorer patients (i.e. those admitting to
municipal hospitals). It has also approved a second investment in a company
that imparts civil construction skills to unemployed rural youth and places
them directly with construction companies after training. Several other
investment opportunities are under consideration in areas such as rural
solar lighting, municipal solid waste based biomethanation plants, etc.;

The Foundation signed an MoU with the Hampi World Heritage Area Management
Authority and the Gram Panchayat of Anegundi Village for grant funding of
an innovative rural community sanitation upgradation project, which is
expected to serve as a prototype for infrastructure upgradation in the
Hampi area.

2. Abridged Consolidated Profit and Loss Account for IDFC:

RS. CRORE 2009-10 2008-09

TOTAL OPERATING INCOME 2,107 1,556
of which
Infrastructure Income 1,021 758
Treasury 96 164
TOTAL NET INTEREST INCOME 1,117 922
Principal Investments 333 184
Asset Management 290 203
Investment Banking 183 115
Infrastructure loans related fees 144 110
TOTAL NON-INTEREST INCOME 950 613
Other Miscellaneous Income 40 20
TOTAL OPERATING EXPENSES 549 367
PRE-PROVISIONING PROFITS 1,558 1,189
Provisions and Losses 130 153
PBT 1,429 1,036
Tax 367 278
PAT 1,062 758
Associated Company Profits 1 1
Minority Interest & Pre-acquisition Profits 0 9
CONSOLIDATED PAT AFTER MINORITY INTEREST 1.062 750

ONE FIRM:

INTEGRATING IDFC' S BUSINESS PLATFORMS

All these different activities within IDFC are interwoven through fairly
complex business structures. The Management realised that it was essential
for the success of IDFC to create a unifying culture and governance system
across the different businesses to best leverage each platform. During
2009-10, the Company launched an intensive programme to integrate the
different blocks of IDFC's business. This initiative, called One Firm',
cuts across functional domains like human resource, internal processes and
systems, risk management and corporate governance.

The goal is to align all sections of the organisation internally to
generate even better customer value propositions and returns to
shareholders. It focused on softer aspects like customer orientation,
collaboration across platforms and efforts to leverage different
capabilities across departments and businesses. While this initiative is an
ongoing process, special mention needs to be made of the developments
during the year on three broad fronts, which form the backbone of the
initiative. These include cultural integration, implementation of a more
comprehensive risk management framework and creation of an organisation-
wide governance structure.

CULTURAL INTEGRATION

On the culture integration front, through widespread employee
participation, the Company's mission and values were discussed. Then these
concepts were then communicated across the organisation. The entire process
was carried out through intensive employee engagement, especially through
workshops. The values system articulated hinges on the acronym - INSPIRE
(Integrity, Nurturing Humility, Stewardship, Partnership, Initiative,
Responsibility and Excellence). The Company is in the process of:

* Aligning internal frameworks and policies to reflect the values
articulated.

* Launching the intranet, which becomes a virtual space for employees to
connect, collaborate and communicate.

* Supporting this initiative through a recognition programme that promotes
employees for setting examples in living the values.

* Incorporating 'Values Performance' into the performance management
process.

RISK MANAGEMENT

Essentially, a company like IDFC is exposed to three categories of risk:
market risk, credit risk and operational risk. The Company is implementing
an Enterprise Risk Management (ERM) framework that adopts an integrated
approach to managing all the three types of risks across all entities in
the IDFC group. On the market and credit risks front, IDFC has had a
strong risk management framework in place. There is focus on loan portfolio
assessment, Asset-Liability Management (ALM), and loan pricing. In
addition, the Company has been developing various market risk modules.

On the credit risk front, there is a comprehensive portfolio review of all
project assets and equity investments of the Company on a semi-annual
basis. Each credit is analysed individually and then integrated at the
portfolio level. The overall portfolio risk report is regularly presented
to a Board Committee comprising of independent directors.

The Risk Group also closely focuses on ALM. To enhance the effectiveness of
the current During 2009-10, the Company launched an intensive programme to
integrate the different blocks of IDFC's business. This initiative, called
One Firm', cuts across functional domains like human resource, internal
processes and systems, risk management and corporate governance. Ashoka
Buildcon National Highway Project on NH - 6 process of regular monitoring
of liquidity and interest rate risks, IDFC has sourced a sophisticated
software-based ALM system. This will enable the Company to capture data
from various disparate platforms, and allow for more detailed and
comprehensive analysis.

Given the rising volatility of interest rates as well as introduction of
new products in the treasury portfolio, IDFC has also increased the level
of monitoring of market risk. This involves measuring interest rate risk on
a regular basis as well as testing newer models for analysis. With the
regulatory framework for banks and financial institutions is currently in
transition to the Basel II environment, the risk measurement and monitoring
framework is being accordingly enhanced. IDFC has initiated efforts to
align the capital allocation to different asset categories in line with the
Basel II framework.

In 2009-10 there was a concerted effort to focus on organisation-wide
operations risk management framework. While the initiative was launched
with awareness created at the Board level and downwards, the implementation
process was bottoms-up. The purpose was to make every department across
different business segments aware of the risks related to its operations
and then work on managing some of the top risks in terms of probability of
occurrence and impact. The exercise included identifying risks, classifying
them in terms of probabilities and impact and devising control measures.
The risks were classified first in a 3 x 3, and subsequently by a 5 by 5
matrix.

A system has also been devised to convert these into department-wise and
unit-wise heat maps.

The risk management system is supported by customised software, which:

* Allows real-time tracking and monitoring of all types of risks;

* Provides precise information on activities, risks and controls to all;

* Has the capability to track, understand and manage information across the
organisation;

* Generates risk heat maps at all levels of the business;

* Shows the list of open issues at any point of time;

* Enables setting up central repository for all policy and procedures;

Enables standardising of all group policies and procedures;

* Provides trend analysis on risk history to take proactive measures.

Especially on the risk management front, there are separate active sub-
committees. These include the Portfolio Review Committee (for portfolio or
credit risk), the Asset Liability Committee (for market risk) and the
Operational Risk Committee (for operational risk). The Managing Director or
his nominee and a Board member are part of these committees, in addition to
other functional managers.

2009-10 was the first year of this initiative. Going forward it will be
developed with a greater degree of sophistication in gauging the
probability and impact of risks.

GOVERNANCE STRUCTURE

The entire company is governed by a structure that cuts across the
different businesses. At the top of this structure are six Board-level
committees the Executive Committee, the Audit Committee, the Compensation
Committee, the Investor Grievance Committee, the Risk Committee and the
Nomination Committee. The terms of reference, mandate, constitution, quorum
and periodicity of meetings of these committees have been re-defined in
line with business requirement. These committees are supported by sub-
committees at the unit level and responsibilities and reporting structures
are linked across all entities within IDFC.

FINANCIAL REVIEW

The abridged consolidated Profit & Loss accounts of IDFC for 2008-09 and
2009-10 are presented in Table 2.

Highlights of the performance are:

* Total operating income increased by 35%, driven by a 21% increase in net
interest income and a 55% growth in non-interest income.

* Within interest income, there was a significant growth of 35% in income
from infrastructure lending, and this growth was on a large base. Treasury
income reduced by 41%.

* Non-interest income increased across all platforms-income from principal
investments increased by 81%; asset management increased by 42%; investment
banking increased by 59%; and loan related and other fees increased by 30%.

* The healthy growth in operating income has resulted in a 31% increase in
pre-provisioning profits to Rs.1,558 crore (Rs.16 billion) in 2009-10.

* With lower provisions, Profit Before Tax (PBT) increased by 38% to
Rs.1,429 crore (Rs.14 billion) in 2009-10; And; PAT increased by 42% to
Rs.1,062 crore (Rs. 11 billion) in 2009-10.

INFORMATION TECHNOLOGY (IT)

IDFC recognizes the power of technology and continues to augment technology
resources to streamline & standardize processes, provide faster response to
clients and also effectively network the different companies, branches and
operations. This year the technology operation were realigned in a manner
to provide IT services in a shared manner across the IDFC group through
centralizing the IT operations, creating helpdesk operations, outsourcing
routine activities and through upgrading and integrating all the networks.
Considerable effort has also been made to upgrade all the hardware, storage
and network with a view to be current on technology and to support the
growth in operations. All key offices of all companies are connected on an
online basis to our network including our overseas office at Singapore.
Alongside this upgrade, steps like network segregation, critical equipment
failover & redundancy & endpoint security were initiated to enhance the
network security, availability & robustness. The technology team helped the
securities electronic trading business to increase the client offering
through the lowtouch direct market access (DMA) system and now this
operation is also geared to provide a no-touch DMA to its clients.

An implementation of group wide VoIP (Voice over Internet Protocol) based
phone system, integrated with our data and video network has helped in
bringing people together in a cost effective manner. A key activity this
year was the shifting of almost all offices of IDFC which included shift
of many client-facing and time sensitive operations including the complex
dealing room operations. A well orchestrated effort by the IT team ensured
a smooth transition into the respective new premises with no downtime on
all critical operations.

There has been consistent progress in building newer applications to meet
the growing need for improved operations and enhanced information needs.
The year saw a push in this direction in view of the growth plans and the
diverse nature of our acquired businesses. Among many initiatives in the
software applications front, Ismart, Treasury & HR software were the key
implementations with wideranging impact. In collaboration with the user
teams we have stabilized the operations of iSmart', our core business
application. The In 2009-10 there was a concerted effort to focus on
organisation-wide operations risk management framework. While the
initiative was launched with awareness created at the Board level and
downwards, the implementation process was bottoms-up.

Oracle financials software has been upgraded to include all companies in
the group so as to enable consolidation of accounts at the group level. An
upgrade of our software supporting the treasury has been initiated that
will ensure seamless pass through transaction from front office to
backoffice. A Human Resources application on peoplesoft platform has also
been rolled out across the group to provide a consistent user experience'
to all employees. Corresponding consolidation & upgradations in the key
system software and databases have also been carried out during this year
to provide stability.

IDFC continues its thrust on IT compliance by enlarging the scope of
various security measures to all companies in the group as well as to the
key partners to our businesses. After a three year initial cycle, the
company was recertified as an ISO 27001 compliant company through a
comprehensive audit of our IT operations in September this year. This year
the IT operation of our mutual fund business was also certified to be ISO
27001 compliant. To enhance the hygiene of our systems IDFC continued with
the practice of subjecting its IT operations across all companies to a
comprehensive IT audit by a reputed external firm and this audit was
completed in March 2010. IDFC continues to keep information security focus
also by improving the awareness levels across the group through its various
initiatives like e-learning, lectures, etc.;

IDFC has also initiated various steps towards Green-IT including deploying
energy efficient equipment, monitoring energy consumption at a granular
level and disposing e-waste only through Government authorized recycler
organization.

INTERNAL CONTROLS AND THEIR ADEQUACY

The Company has a proper and adequate system of internal controls to ensure
that all assets are safeguarded and protected against loss from
unauthorised use or disposition, and that the transactions are authorised,
recorded and reported correctly.

Internal controls are supplemented by an extensive programme of internal
audits, review by management and documented policies, guidelines and
procedures. These controls are designed to ensure that financial and other
records are reliable for preparing financial information and other reports,
and for maintaining regular accountability of the Company's assets.

CAUTIONARY STATEMENT

Statements in this Management Discussion and Analysis describing the
Company's objectives, projections, estimates and expectations may be
forward looking statements' within the meaning of applicable laws and
regulations. Actual results might differ substantially or materially from
those expressed or implied. Important developments that could affect the
Company's operations include unavailability of finance at competitive
rates-global or domestic or both, reduction in number of viable
infrastructure projects, significant changes in political and economic
environment in India or key markets abroad, tax laws, litigation, exchange
rate fluctuations, interest and other costs.